Investors should drop idea of UK Retail plc, says analyst

While factors such as consumer confidence, disposable income and cost pressures are often lenses through which the industry is viewed generically, investors should assess retailers in other ways, he maintained.

In a lengthy note entitled ‘Doom and Boom’, Stevenson said: “There is no UK Retail plc. There is no longer an average retailer with structural growth and recovery stocks showing progress while others move backwards or struggle to stand still.”

He observed: “In the past, when pulling together a sector note, we started by examining the macro-economic drivers, then formed a view of the potential impact on the metrics for the retail sector and highlighted our winners and losers.

“However, companies in the retail sector no longer move in unison. There is a widening divergence between the winners and losers.”

He preferred to identify retailers according to whether they offer structural growth, recovery potential, self-help opportunity or are structurally challenged. International operations and multichannel are also key investment themes.

Stevenson put seven stocks in his preferred category of structural growth including Asos, Dunelm, Mothercare, N Brown, SuperGroup and Ted Baker.

Dunelm is Peel Hunt’s top pick. Stevenson explained: “Dunelm’s store roll-out plans make the group the most significant potential UK organic growth opportunity.

“While such a roll-out would be more compelling against the backdrop of consumer stability, cash returns remain strong with gross margin upside.

“We see the opportunity for Dunelm to gain greater recognition as a national brand as a catalyst for trading and share price.”

He said that retailers in the recovery group include Game, Halfords and Topps Tiles while those considered at risk include Dixons, Home Retail and HMV.

“The recovery and at-risk segment is where the most lively debate lies,” said Stevenson. “We have taken an early stand in favour of Game, reflecting a confidence that customer demand for pre-owned product and new hardware will underpin recovery. Without such conviction, the bear argument would classify Game in the same category as HMV.”

HMV, electricals retailers and Argos-owner Home Retail are at risk of downgrades, he said.